Four keys to early retirement

By James Osborne

Published: 2013.11.19 03:02 AM

You're there! You've spent the better part of your lifetime working, earning, saving and investing prudently. Maybe you sold your business or are taking off the corporate suit and tie for the last time. Whatever the backstory, you're ready to retire early and you have some big decisions that need to be made.

Health Insurance

Early retirees are among those who stand to benefit most from the rollout of the Affordable Care Act. Unless one was offered retiree health care (which is quickly going the way of the dodo) or had a working spouse with health benefits, an early retiree could easily be turned down for a private insurance policy or face insanely steep premiums. ACA changed this in two significant ways. First, private health insurance policies are no longer medically underwritten and are mandatory-issue, so applicants cannot be turned down for pre-existing conditions. Second, The structure of the insurance marketplace has also changed across age groups as more of the cost of pooled risks has shifted from individuals in their 50s and 60s to those in their 20s and 30s. Early retirees will now find more affordable and more accessible policies.

Social Security Decisions

As with all retirees (who are eligible) will have to make a decision as to when to begin receiving their Social Security benefits. While the standard recommendation for many individuals is to delay benefits until at least one's full retirement age (if not until age 70), there are many factors that come in to play. These include your expected longevity, earned income in retirement, potential spousal benefits, tax consequences, other guaranteed sources of retirement income and more. It may make sense for a married couple to claim benefits at different times, or for the tax consequences of a larger benefit to offset the value of deferring Social Security income. Retirees should consult with their financial professionals to make the most informed decision possible.

To Roll or Not To Roll

Early retirees with an employer-sponsored plan such as a 401(k) will be faced with the decision to roll their retirement assets out of the company plan and into an IRA. There are costs and benefits to the rollover. Unlike an IRA, retired participants in a 401(k) or similar plan can take as-needed distributions from the retirement account at age 55 rather than waiting until age 59.5. However, IRA owners under 59.5 can still take early distributions without a 10 percent penalty if they meet IRS requirements for "substantially equal periodic payments," known as a 72(t) distribution. These distributions must meet certain calculation criteria and must continue for a minimum of five years.

Investors should also consider the impact of available investment options in the company 401(k) plan compared to an IRA. If the company plan is loaded up with expensive, poorly performing mutual funds, it may be worthwhile to give up the ease of early penalty-free distributions from the 401(k) and move to an IRA to take 72(t) distributions for reduced costs and better potential long-term performance.

Your Portfolio

The biggest misconception I regularly see from retirees is the idea that dramatic changes to one's investment portfolio are warranted at the time of retirement. Say goodbye to your co-workers, put on your gold watch and move your portfolio to 100 percent bonds, right? Wrong. A young retiree especially could be facing a 30 or 40 year time horizon in retirement.

Over 30 years, living costs would more than double in an average 3 percent inflation environment. While the emotional shift from working and contributing to your retirement account to retirement and withdrawing from the account is significant, young retirees must still balance the opposing risks of market volatility (by owning some bonds) and long-term inflation (by owning some stocks). A prudent approach links your asset allocation to your retirement projection as part of your long-term financial plan.

James Osborne is a Certified Financial Planner ® professional and President of Bason Asset Management, a Lakewood-based Registered Investment Advisor. He has spent his career in the investment management industry, helping clients manage their portfolios and plan for retirement, legacy and lifetime goals. In addition to the CFP ® professional designation, he has an MBA in Investment Management from the University of Colorado. James has previously instructed CPE courses for the Colorado Society of CPAs. Contact James at james@basonasset.com and learn more at http://www.basonasset.com.